Industry Concerned About LIFO Accounting Changes

ELLIOT ZWIEBACH

The food industry is gathering data to fight efforts in Congress toward the possible repeal of the LIFO method of inventory accounting — proposals that could mean not only higher taxes on inventory going forward, but also back-tax obligations on inventory reserves.

The National Grocers Association, Arlington, Va., is collecting responses from its retail and wholesale members to a survey asking their opinions on what LIFO repeal could mean for their businesses. The full survey results will be reported to the association's members and could ultimately be used in presenting the industry's case before Congress, Tom Wenning, NGA executive vice president and general counsel, told SN last week.

LIFO — last in, first out — is an accounting method that helps companies determine the asset value and tax liability of their inventory. It assumes that products being sold in any given period were purchased at the most recent price paid for that inventory. Since the most recent prices are usually higher due to inflation, LIFO tends to reduce taxable income.

It's been legal since the late 1930s for companies in inventory-intensive businesses and has been used by approximately two-thirds of food retailers and distributors since the 1970s and 1980s, when inflation became rampant, Wenning said.

Although repeal of LIFO is not specifically mentioned as a line item in the 2010 federal budget proposed by President Obama and approved by both houses of Congress, many observers believe LIFO repeal will be included as the House Ways and Means Committee and the Senate Finance Committee work on specific legislation to boost tax revenues.

If LIFO were repealed, some sources estimate it could boost tax revenues by about $60 billion.

One wholesaler told NGA that if LIFO were repealed, “the tax burden would be catastrophic both for cash flow and our banking relationship,” Wenning said.

Gary Giblen, managing director of Goldsmith & Harris, New York, told SN he believes repealing LIFO would be “insane.”

“Anything that lowers taxable income is something a retailer would want to be there,” he explained. “It's an insane idea to repeal it, because inflation is part of life, especially in food, and no one disputes inflation will pick up in the next few years because of the effect of the stimulus programs.

“Although eliminating LIFO would produce higher incomes, which would have a positive effect on stock prices, it would also result in higher taxes.”

According to Wenning, “What's of even more concern is the impact the repeal would have on LIFO reserves, because as part of the repeal, companies that have millions of dollars in reserves would be subject to paying taxes on those reserves, which are only an accounting function on the books and not cash — the reserves simply record the amount a business has reinvested in inventories affected by inflation.

“We consider that a phantom tax — and it could be so huge that, even if it were phased in, it would have major consequences for our members, because they would not have sold the inventory to pay for recapturing those reserves that had accumulated over decades.”

Giblen also said taxing companies on their cumulative reserves would be unfair. “It would mean a company that's been using LIFO for 35 years and has generated millions of dollars in higher inventory values would have to pay a very high tax for the reserves accumulated over those years.

“That would be especially hard on smaller business, and it could create a make-or-break situation — and it wouldn't make accounting any more accurate than it is today.”

NGA is part of a LIFO Coalition made up of 85 trade associations that include footwear companies, equipment manufacturers, automobile dealers and textile companies, all working together to head off potential legislation.

According to a white paper issued by the coalition, LIFO provides the same tax advantage for some taxpayers as FIFO — first in, first out — provides for others.